If we’re at the new norm of industry-low volume, what’s next?
Reverse Market Insight’s recap of June 2019 endorsements states, “2,500 endorsements per month is the default volume setting for the industry right now”. Calculate that out and that would equate to a new low in annual HECM endorsements totaling just over 31,000 loans insured by the FHA this fiscal year (which ends September 30, 2019).
“It’s only up from here” (anonymous)
If there’s a silver lining it would be that perhaps we’ve reached a functional low for HECM loan volumes. Functional in the sense that the remaining large lenders and brokers have found a way to succeed in today’s market.
For those watching our industry’s volume plummet with a growing sense of unease, consider the following:
- Our distribution network has been sharply reduced with the exit of Wells Fargo, Bank of America, MetLife, Generation Mortgage, and most recently LiveWell Financial.
- We no longer have a national brick & mortar distribution network with the absence of the largest national banks who once marketed and originated HECMs.
- Loan proceeds have been reduced considerably with a series of principal limit factor reductions that began in 2009 and accelerated in subsequent years with the most recent reduction in October 2017.
- Only one national lender is consistently seen on American’s TV sets; AAG’s Tom Selleck ads continue in the lender’s national marketing campaign.
- Private or proprietary reverse mortgages are gaining popularity; just how much remains to be seen as lenders are not reporting loan volumes presently. The increasing popularity of these loans may be slightly depressing HECM volume.
- Interest rates remain low and further cuts to the federal funds rate are anticipated which may impact the LIBOR rates used on Home Equity Conversion Mortgages to the point where we breach the 3% interest rate floor. Prior to October 1, 2017, the HECM interest rate floor was 5%. Notwithstanding any further PLF cuts, this should increase borrower proceeds.
- The U.S. median home price was $334,400 in Q4 of 2013 and stands at $377,700 in Q1 of 2019. That’s a 12-percent increase on average, with several markets, far exceeding the median price.
- While principal limit factors (PLFs) have been reduced 30% on average since 2013, increasing home values have offset the net reduction to an approximate 12-percent net reduction in proceeds using today’s current PLFs compared to the 2013 tables which stopped at 5% (interest rate floor).
- Select originators are reporting an increase in monthly loan volume.
Barring any further reduction of PLFs or additional restrictions, we may have tested the bottom of the lowest volume of HECM loans. If that is the case, it’s only up from here.
2 Comments
Very interesting article,
The 2 things that you identified that standout the most to me are
(1) Only one national lender is consistently seen on American’s TV sets; AAG’s Tom Selleck ads continue in the lender’s national marketing campaign.
and
(2) While principal limit factors (PLFs) have been reduced 30% on average since 2013, increasing home values have offset the net reduction to an approximate 12-percent net reduction in proceeds using today’s current PLFs compared to the 2013 tables which stopped at 5% (interest rate floor).
It is a fact that AAG is the #1 reverse mortgage originator and One Reverse is #2 and they have both held that post for a long time.
Doesn’t common sense logic then dictate to duplicate or at least in some way do what the top 2 reverse originators are doing?
Of course everyone can’t afford to have a national TV star ad campaign but some of the larger reverse lenders certainly could.
National TV advertising obviously generates business but they also help the industry as a whole by increasing product awareness and general acceptance.
Basically what AAG and One Reverse has consistently proven is that advertising to a large national audyour ience far surpasses anything else with regard to generating reverse mortgage business.
Therefore, my general advice is for ALL reverse lenders to STOP wasting your time having originators lollygag about town hoping to get a referral and spend some consistent money on advertising the benefits of the reverse mortgage to the general population.
A national TV ad campaign IS NOT the only form of advertising that is effective!
For those of you who are not very sophisticated or knowledgeable in advertising here is a small list of possible ad campaigns.
Direct mail, local cable TV, radio, newspapers and local publications, newspaper inserts, telemarketing, internet leads (aged and new), live transfers
I have done all of the above and each one succeeded although obviously some campaigns performed better than others.
NOTE: Making a bunch of worthless irritatingly long boring videos on LinkedIn, YouTube, twitter and other forms of social media does not work and I am personally tired of seeing it so please stop doing this.
Furthermore, I would be remiss not to point out how unfathomable it is to continue to write articles featuring supposedly successful leaders in the reverse industry who provide their personal concepts and ideas even though they don’t originate reverse mortgage loans.
I see this all the time.
Please stop doing that as they are and have been leading our industry in the wrong direction for a long time which is why there are so few reverse mortgages originated today.
Think about it, over the last 5 years, if the concepts that were frequently promoted by the reverse industry media outlets were so successful then TODAY why does our industry have the lowest volume ever?
Lastly,
If you have identified that only a 12% reduction of the PLF is relevant since 2013 then I guess that squashes most of the individuals that argue that the reduction of PLF is the reason for the historical low reverse volume.
Of course, since I actually originate reverse mortgages I already knew this as a 12% reduction is simply not negative enough of a factor to decimate our industry’s volume to where it is today.
No, we can thank all of the people who are responsible for so aggressively promoting the idea that the professional referral is the key to our industry’s growth for that.
Like most optimistic reports, optimism leads to less than accurate claims of fact. So let us look at some of them.
In contrast to RMI, there is nothing to indicate that endorsements will be as low as 2,500 in any of the next three months. Based on case number assignments for the three months ended 5/31/2019 of 13,108, and the current annualized but modified conversion rate of applications with case number assignments that turn into endorsements of about 67.6%, the projected endorsements for fiscal 2019 is much closer to 32,600, than 31,000. 32,600 endorsements for fiscal 2019 is still 15,759 lower than for fiscal 2018. That difference still represents an endorsement loss of 32.6% from the endorsements for fiscal 2018. Again that is the largest percentage loss when comparing the endorsements for one fiscal year to the endorsements for the fiscal year that immediately follows. The next highest percentage loss rate stands at 31% for fiscal year 2010 when comparing its total HECM endorsements to those of fiscal 2019.
The reduction in principal limit factors (PLFs) began in fiscal 2010 which was a reaction to a positive credit subsidy estimate by OMB for the fiscal year 2010 budget of $798 million.
Another issue is interest rates. The only rate that currently impacts HECM proceeds on an adjustable rate HECM is the expected interest rate and that is a combination of the loan’s margin plus the LIBOR 10 Year Swap Rate Index. Remembering that the Fed is highly unlikely to raise or lower interest rates until 2020, it is unclear that the expected interest rate will fall to 3% yet it seems that is a possible (but not likely) outcome.
When it comes to the values of residential homes in the country, national appreciation rates are next to useless. As the old adage goes, the three principles of understanding the US home residential market boils down to just three words and one conjunctive: “Local, local, and LOCAL.” The point about some areas having average home values exceeding the national average is true but so is the opposite.
As it is impossible to tell what is going on in your local home resident from national numbers, it is also impossible to tell what is going on nationally from the information from a couple of dozen local residential markets.
Here is how unverified anecdotal data can lead to contradictory information. It is stated above that PLFs have fallen by an average of 30%. If that is the case why would the box above show that the PLF was 0.541 in 2013 and 0.430 in 2017? That is a drop of 20.5%, not 30%.
We have been hearing for months now that “select” originators are reporting better closing numbers. Yet n looking at case number assignments, they having dropping month by month for the past 2 months. The case number assignment total for May 2019 is 3.61% lower than for April 2019. Is June’s lower yet? We will know soon.
Unverified anecdotes of the optimists in this industry are like rabbit holes leading us to mad hatters who forecast HECM endorsements of 300,000 in 2018 when in fact we were in the second year of six fiscal years of slightly downward sloping secular stagnation. We were being told that collaboration would rule the day when, in fact, the industry had the lowest HECM endorsement production in fiscal 2018 than in any fiscal year since fiscal 2005. Fiscal 2019 is even worse. Read about that prediction of 300,000 HECM endorsements online in the November-December 2013 issue of the Reverse Mortgage Magazine, the flagship publication of the industry trade organization, NRMLA. As to the glorious depiction of the collaboration that would bring in this era of never before imagined prosperity, see https://www.housingwire.com/articles/45618-last-word-the-benefit-of-collaboration
In conclusion, it is time we turn away from unverified anecdotal data and optimism for the sake of optimism. We have been there and done that. We are still dealing with the foolishness of 2013 and 2014. Let us be positive, tempered by realism. Please do not bring up worthless pessimism. Although not as poor as pessimism, optimism makes people feel that they can do anything so like the dormouse says, optimists feed their heads with good thoughts throwing hundreds of thousands of dollars away in worthless marketing efforts as seen in the Extreme Summit. No wonder no one dares speak of the folly of the Extreme Summit.